Economists Cut U.S. Growth Estimates on Drop in Health Spending

June 11 (Bloomberg) -- The U.S. economy probably contracted
even more in the first quarter than currently estimated as
spending on health-care services unexpectedly dropped, according
to analysts at JPMorgan Chase & Co. and Pierpont Securities LLC.

Quarterly data on services issued today by the Census
Bureau showed health-care outlays dropped at a 5.8 percent
annualized rate from January through March compared with the
government’s current estimate of a 9.7 percent gain, said Daniel
Silver, a JPMorgan economist in New York, based on the bank’s
own seasonal adjustment. The pullback means gross domestic
product shrank at about a 1.6 percent pace in the first three
months of the year, according to JPMorgan’s calculations.

The world’s largest economy contracted at a 1 percent rate
in the first quarter, the first drop in three years, as
companies added to inventories at a slower pace and curtailed
investment, according to revised figures issued May 29. The
numbers will be revised again on June 25 as more data, including
the information on services issued today, become available.

Today’s report “should mean there’s a downward revision,”
Silver said in an interview. The “first quarter is going to be
weaker.”

Silver said JPMorgan analysts are less confident in their
tracking estimate than usual because it is subject to further
guidance from the Bureau of Economic Analysis, which is
responsible for calculating GDP data. The effects of President
Barack Obama’s signature health-law care are difficult to
quantify and may mean the BEA decides to modify the way it
interprets today’s survey data, he said.

Cutting Estimates

A research note from Stephen Stanley, chief economist at
Pierpont Securities LLC in Stamford, Connecticut, put his
tracking estimate at minus 2 percent for the first quarter based
on the new services data.

Stanley said the implications for second-quarter growth are
also negative as the government will need to revisit its
assumptions on how the Affordable Care Act is affecting consumer
expenditures.

The economy will probably grow at a 2.9 percent pace in the
second quarter, and today’s report biases “the potential
results downward,” Guy LeBas, chief fixed-income strategist at
Janney Montgomery Scott LLC in Philadelphia, said in a research
note. “In an environment of economic complacency, yet another
downward revision to 1Q growth could cause enough of a
psychological effect to move the markets, and evidence is
mounting that the 2Q bounce will be much smaller than originally
thought.”

Bloomberg Survey

Economists surveyed by Bloomberg this month projected GDP
will grow at a 3.5 percent pace in the second quarter.

The implications for this quarter aren’t clear-cut, said
Silver. The government tracks the health-care data based on a
four-quarter moving average, so it’s important to take a longer-term view, he said. Because the Affordable Care Act took effect
within the latest 12-month period, this complicates the
calculations even more, said Silver.

“There’s some reason to believe that health-care
consumption would be stronger in the first half of the year, so
maybe that implies that we’ll see a stronger bounce-back in the
second quarter,” Silver said in the interview. “On the other
hand, you could say: ‘Well this is showing the underlying trend
is weaker, so Q2 should be softer.’ So we don’t really know what
this means. A lot of this is open to interpretation of the BEA
and how they estimate the data.”